<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 29, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21374
THE DII GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1224426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6273 Monarch Park Place
Suite 200
Niwot, Colorado 80503
(Address and zip code of principal executive offices)
(303) 652-2221
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS May 4,1998
----- ----------
<S> <C>
Common Stock, Par Value $0.01 25,146,562
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
For the first quarter ended
Mar. 29, 1998 Mar. 30, 1997
------------- -------------
<S> <C> <C>
Net sales:
Contract electronics manufacturing $ 150,419 85,001
Other 84,955 52,079
------------ ------------
Total net sales 235,374 137,080
Cost of sales:
Cost of sales 201,932 110,900
Non-recurring charges 12,844 --
------------ ------------
Total cost of sales 214,776 110,900
------------ ------------
Gross profit 20,598 26,180
Selling, general and administrative expenses 19,176 16,137
Non-recurring charges 41,156 --
Interest income (927) (242)
Interest expense 4,719 1,700
Amortization of intangibles 1,121 800
Other, net (168) 93
------------ ------------
Income (loss) before income taxes (44,479) 7,692
Income tax expense (benefit) (12,432) 2,615
------------ ------------
Net income (loss) $ (32,047) 5,077
============ ============
Earnings (loss) per common share:
Basic $ (1.27) 0.21
Diluted $ (1.27) 0.20
Weighted average number of common shares and equivalents outstanding:
Basic 25,303 24,060
Diluted 25,303 29,730
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 3
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,037 85,067
Accounts receivable, net 135,533 132,590
Inventories 80,493 74,059
Other 8,722 8,535
------------ ------------
Total current assets 287,785 300,251
Property, plant and equipment, net 175,450 207,257
Intangible assets, net 76,694 77,653
Other 7,733 7,568
------------ ------------
$ 547,662 592,729
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 101,343 98,688
Accrued expenses 24,330 29,766
Accrued interest payable 2,932 4,688
Current installments of long-term financing obligations 5,631 6,491
------------ ------------
Total current liabilities 134,236 139,633
Senior subordinated notes payable 150,000 150,000
Convertible subordinated notes payable 86,247 86,250
Long-term financing obligations, excluding current installments 4,126 6,545
Other 2,817 2,953
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value; 45,000,000 shares
authorized; 25,733,056 and 25,328,914 shares issued and
25,105,556 and 25,136,414 shares outstanding 257 253
Additional paid-in capital 119,756 117,612
Retained earnings 78,056 110,103
Treasury stock, at cost; 627,500 and 192,500 shares (13,379) (4,209)
Cumulative foreign currency translation adjustments (4,104) (4,095)
Deferred stock compensation (10,350) (12,316)
------------ ------------
Total stockholders' equity 170,236 207,348
------------ ------------
$ 547,662 592,729
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 4
THE D I I GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE FIRST QUARTER ENDED
-------------------------------
MAR. 29, 1998 MAR. 30, 1997
------------- -------------
<S> <C> <C>
Net cash provided (used) by operating activities $ (585) 11,090
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (15,153) (14,293)
Proceeds from sales of equipment 3,352 131
------------ ------------
Net cash used by investing activities (11,801) (14,162)
------------ ------------
Cash flows from financing activities:
Payments to acquire treasury stock (9,170) --
Repayments of long-term financing obligations (3,279) (4,805)
Repayments of notes payable to sellers of businesses acquired -- (411)
Proceeds from stock issued under stock plans 2,834 676
------------ ------------
Net cash used by financing activities (9,615) (4,540)
------------ ------------
Effect of exchange rate changes on cash (29) 49
------------ ------------
Net decrease in cash and cash equivalents (22,030) (7,563)
Cash and cash equivalents at beginning of year 85,067 25,010
------------ ------------
Cash and cash equivalents at end of period $ 63,037 17,447
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 5
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Financial information as of December 28, 1997 has been derived
from the audited consolidated financial statements of The DII Group, Inc. and
subsidiaries (the "Company" or "DII").
The condensed consolidated financial statements do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements as of and for the year ended December 28, 1997 included in
the annual report on Form 10-K previously filed with the Securities and Exchange
Commission (the "SEC"). In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included in the accompanying condensed consolidated
financial statements. Operating results for the three-month period ended March
29, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 27, 1998.
The Company operates and reports financial results on a fiscal year of 52 weeks
ending on the Sunday nearest to December 31. Accordingly, fiscal 1997 comprised
52 weeks and ended on December 28, 1997 and fiscal 1998 will comprise 52 weeks
and end on December 27, 1998. The accompanying condensed consolidated financial
statements are therefore presented as of and for the three month periods ended
March 29, 1998 and March 30, 1997.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 59,705 51,802
Work in process 28,659 24,890
Finished goods 3,629 2,839
------------ ------------
91,993 79,531
Less allowance 11,500 5,472
------------ ------------
$ 80,493 74,059
============ ============
</TABLE>
The Company made provisions to the allowance for inventory impairment (including
non-recurring charges, see Note 6) of $6,028 and $1,389 during the three months
ended March 29, 1998 and March 30, 1997, respectively.
<PAGE> 6
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(3) ACQUISITIONS
During the second quarter of 1997, the Company completed certain business
combinations that are immaterial to the Company's results from operations and
financial position. The cash purchase price, net of cash acquired, for these
acquisitions amounted to $7,939. The fair value of the assets acquired and
liabilities assumed from these acquisitions was immaterial. The cost in excess
of net assets acquired through these acquisitions amounted to $9,133.
These acquisitions were accounted for as purchases with the results of
operations from the acquired businesses included in the Company's results of
operations from the acquisition dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
(4) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation and environmental matters
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1997. In April 1998, the Company reached a Consent Order with the
New York Department of Environmental Conservation concerning the performance of
a remedial investigation/feasibility study with respect to environmental matters
at the Kirkwood Site. The ultimate outcome of these matters cannot, at this
time, be predicted in light of the uncertainties inherent in these matters.
Based upon the facts and circumstances currently known, management cannot
estimate the most likely loss or the maximum loss for these matters. The Company
has accrued the minimum estimated costs, which amounts are immaterial,
associated with these matters in the accompanying condensed consolidated
financial statements.
The Company determines the amount of its accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
The Company has approximately $6,900 of capital commitments as of March 29,
1998.
As of March 29, 1998, the Company has an $80,000 senior secured revolving
line-of-credit which expires in June 2002. This credit facility requires
compliance with certain financial covenants and is secured by substantially all
of the Company's assets. As of March 29, 1998, there were no borrowings
outstanding under the line-of-credit, and the Company was in compliance with all
financial covenants.
<PAGE> 7
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(5) STOCKHOLDERS' EQUITY
During the first quarter of 1998, the Company repurchased 435,000 shares of its
common stock at a cost of $9,170. The Company could repurchase an additional
372,500 shares of common stock in future periods as part of a one million share
repurchase plan that began in December 1997. Future common stock repurchases are
subject to then existing market and general economic conditions.
(6) NON-RECURRING CHARGES
In March 1998, the Company recognized a non-recurring charge of $54 million,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor. The charge was primarily due to the
impaired recoverability of certain sales contracts, inventory, intangible assets
and fixed assets.
The DII Group purchased Orbit in August of 1996, and, as a precondition to the
merger, supported Orbit's previously made decision to replace its wafer
fabrication facility (fab) with a higher technology fab. The transition to this
6-inch fab was originally scheduled for completion during the summer of 1997,
but the changeover took longer than expected and was finally completed in
January 1998.
The missed plan for the changeover and running both fabs simultaneously put
pressure on the work force, with resulting quality problems. Compounding these
problems, the semiconductor industry has been characterized by excess capacity
that arose about the time Orbit was acquired, which has led larger competitors
to invade Orbit's niche market. Further, many of Orbit's customers are migrating
faster than expected to a technology in excess of Orbit's fabrication
capabilities, requiring Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this one-time charge to correctly size
Orbit's asset base to allow its recoverability based upon its current business
size.
The non-recurring charges consisted of (i) $38,258 associated with the
write-down of long-lived assets to fair value, (ii) $7,900 associated with the
impairment of sales contracts and accounts receivable as well as estimated costs
for sales returns and allowances, primarily as a result of the fab changeover
quality issues, and (iii) $7,842 primarily associated with excess inventory
created by quality issues and the downsizing of Orbit's operations.
(7) COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board (FASB) Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"), at the beginning of fiscal
year 1998. SFAS 130 establishes standards for reporting and display of
comprehensive earnings and its components in general purpose financial
statements. Components of comprehensive income are net income and all other
nonowner changes in equity such as the change in the cumulative foreign currency
translation adjustments. This statement requires that an entity: (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display an amount representing total comprehensive income for the period in
that financial statement. The adoption of this statement had no impact on the
Company's net earnings or shareholders' equity. There were no material
differences between net earnings (loss) and comprehensive income (loss) for the
three months ended March 29, 1998, and March 30, 1997. The Company has
<PAGE> 8
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(7) COMPREHENSIVE INCOME, CONTINUED
accumulated other comprehensive losses at March 29, 1998 and March 30, 1997
which consisted of foreign currency translation adjustments of $4,104 and
$4,001, respectively.
(8) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------
MAR. 29, MAR. 30,
1998 1997
------------ ------------
<S> <C> <C>
BASIC EPS:
Net income (loss) $ (32,047) 5,077
============ ============
Weighted-average common shares outstanding 25,303 24,060
============ ============
Basic EPS $ (1.27) 0.21
============ ============
DILUTED EPS:
Net income (loss) $ (32,047) 5,077
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible subordinated -- 776
notes
Amortization (net of tax) of debt issuance cost on
convertible subordinated notes -- 65
------------ ------------
Net income (loss) available to common stockholders $ (32,047) 5,918
============ ============
Shares used in computation:
Weighted-average common shares outstanding 25,303 24,060
Shares applicable to exercise of dilutive options -- 1,008
Shares applicable to deferred stock compensation -- 62
Shares applicable to convertible subordinated notes -- 4,600
------------ ------------
Shares applicable to diluted earnings 25,303 29,730
============ ============
Diluted EPS $ (1.27) 0.20
============ ============
</TABLE>
For the three month period ended March 29, 1998, the common equivalent shares
from common stock options and deferred stock compensation are excluded from the
computation of diluted loss per share as their effect is antidilutive.
Additionally, the convertible subordinated notes were antidilutive for the three
month period ended March 29, 1998, and therefore not assumed to be converted for
diluted loss per share computations.
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, but are not limited
to, statements regarding contingencies, litigation, environmental matters,
liquidity and capital expenditures herein under "Part I Financial Information -
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations." Actual results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth below.
A. OVERVIEW
The Company is a leading provider of electronics design and manufacturing
services that operates through a global network of independent business units.
These business units are uniquely linked to provide the following related
products and services to original equipment manufacturers ("OEMs"): design and
manufacture of custom microelectronics; design and manufacture of printed
circuit boards; assembly of printed circuit boards; process tooling; machine
tools; process automation equipment; in-circuit and functional test hardware and
software; and final systems assembly. By offering comprehensive and integrated
design and manufacturing services, the Company believes that it is better able
to develop long-term relationships with its customers, expand into new markets
and enhance its profitability.
The Company provides the following related products and services to customers in
the global electronics manufacturing industry:
Custom Microelectronics--Through Orbit Semiconductor ("Orbit"), the
Company provides semiconductor design, manufacturing and engineering
support services to its OEM customers. Orbit provides cost-effective
gate array conversion services, mixed-signal design and production
capabilities as well as high-reliability manufacturing. Orbit utilizes
a combination of internal fabrication capabilities and external foundry
suppliers, thereby using a "fab/fabless" manufacturing approach.
Interconnect Technologies--The Company provides design and
manufacturing services for printed circuit assemblies through Design
Solutions ("DSI") and manufactures high density, complex multilayer
printed circuit boards through Multek.
Systems Assembly--The Company assembles complex electronic circuits and
provides final system configuration (contract electronics
manufacturing, or "CEM") through Dovatron International ("Dovatron").
Process Technologies--The Company manufactures surface mount printed
circuit board solder cream stencils on a quick-turn basis through IRI
and Chemtech; designs and manufactures in-circuit and functional test
software and hardware on a quick-turn basis through TTI Testron;
manufactures depaneling systems that route individual printed circuit
boards from an assembled master panel in the final step of the
electronics assembly process through Cencorp; and manufactures process
automation equipment through PCT Automation Systems ("PCT").
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW, CONTINUED
With the above core competencies, the Company has the ability to provide
customers with a total design and manufacturing outsourcing solution. The
Company's ability to offer fully integrated solutions with value-added front-
and back-end product and process development capabilities coupled with global
volume assembly capabilities provides customers with significant speed-to-market
and product cost improvements.
Operating results may be affected by a number of factors including the economic
conditions in the markets the Company serves; price and product competition; the
level of volume and the timing of orders; product mix; the amount of automation
existing on specific manufacturing projects; efficiencies achieved by inventory
management; fixed asset utilization; the level of experience in manufacturing a
particular product; customer product delivery requirements; shortages of
components or experienced labor; the integration of acquired businesses;
start-up costs associated with adding new geographical locations; expenditures
required for research and development; and failure to introduce, or lack of
market acceptance of, new processes, services, technologies and products on a
timely basis. In addition, the level of sales can greatly shift based on whether
certain projects are contracted on a turnkey basis, in which the Company
purchases materials, versus on a consignment basis, in which materials are
provided by the customer.
A majority of the Company's sales are to customers in the electronics industry,
which is subject to rapid technological change, product obsolescence and price
competition. The factors affecting the electronics industry (especially the
semiconductor sector) in general, or any of the Company's major customers, in
particular, could have a material adverse affect on the Company's operating
results. The electronics industry (especially the semiconductor sector) has
historically been cyclical and subject to significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and overcapacity. These factors, which may affect the
electronics industry in general, or any of the Company's major customers, in
particular, could have a material adverse effect on the Company's operating
results. The future success of the Company's businesses will depend largely upon
its ability to enhance its existing products and services or to acquire new
products and manufacturing processes in order to keep pace with changing
technology and industry standards and meet the changing needs of customers.
There can be no assurance that the Company will be able to keep pace with the
rapidly changing technology trends. The introduction by competitors of new
technologies or the emergence of new industry standards and customer
requirements could render the Company's existing products and processes
obsolete, unmarketable or no longer competitive.
The Company seeks a well balanced customer profile across most sectors of the
electronics industry in order to reduce exposure to a downturn in any particular
sector. The primary sectors within the electronics industry served by the
Company are office automation, mainframes and mass storage, data communications,
computer and peripherals, telecommunications, industrial, instrumentation, and
medical.
At any given time, certain customers may account for significant portions of the
Company's business. Hewlett Packard Company ("HP") and International Business
Machines Corporation accounted for approximately 12% and 10% of net sales during
the three months ended March 29, 1998, respectively. No other customer accounted
for more than 10% of net sales during the three months ended March 29, 1998 and
March 30, 1997. The Company's top ten customers accounted for approximately 53%
and 46% of net sales for the three months ended March 29, 1998 and March 30,
1997, respectively. The percentage of the Company's sales to its major customers
may fluctuate from period to period. Significant reductions in sales to any of
these customers could have a material adverse effect on the Company's operating
results. Due to product
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW, CONTINUED
transitions expected during the second quarter of 1998, the Company does not
expect HP to account for more than 10% of net sales for the second quarter of
1998 or for the fiscal year ended 1998, unless additional orders from new
product lines are obtained.
Although management believes the Company has a broad diversification of
customers and markets, the Company has few material firm long-term commitments
or volume guarantees from its customers. In addition, customer orders can be
cancelled and volume levels can be changed or delayed.
From time to time, some of the Company's customers have terminated their
manufacturing arrangements with the Company, and other customers have
significantly reduced or delayed the volume of design and manufacturing services
performed by the Company. The timely replacement of canceled, delayed or reduced
contracts with new business cannot be assured, and termination of a
manufacturing relationship or change, reduction or delay in orders could have a
material adverse effect on the Company's operating results.
The Company has actively pursued acquisitions in furtherance of its strategy to
be the fastest and most comprehensive provider of custom electronics design and
manufacturing services, ranging from microelectronics fabrication through the
final assembly of finished products for OEM customers. The Company's
acquisitions have enabled the Company to provide more integrated outsourcing
technology solutions with time-to-market and lower cost advantages. Acquisitions
have also played an important part in expanding the Company's presence in the
global electronics marketplace. By enhancing the Company's capability to provide
a wide range of related electronics design and manufacturing services to a
global market that is increasingly dependent on outsourcing providers, these
acquisitions have enabled the Company to enhance its competitive position as a
leading provider of comprehensive outsourcing technology solutions.
Acquisitions involve numerous risks including difficulties in assimilating the
operations, technologies, and products and services of the acquired companies,
the diversion of management's attention from other business concerns, risks of
entering markets in which the DII Group has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. There can be no
assurance that the Company will be able to successfully integrate newly acquired
businesses. Such failures could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
continues to experience rapid internal growth and expansion, and with continued
expansion, it may become more difficult for the Company's management to manage
geographically dispersed operations. The Company's failure to effectively manage
growth could have a material adverse effect on the Company's results of
operations.
B. RESULTS OF OPERATIONS
Total net sales for the three months ended March 29, 1998 increased $98,294
(72%) to $235,374 from $137,080 for the comparable period in 1997. Contract
electronics manufacturing, which represented 64% of net sales for the three
months ended March 29, 1998, increased $65,418 (77%) to $150,419 from $85,001
for the corresponding period in 1997. This increase is primarily the result of
the Company's ability to continue to expand sales to its existing customer base
as well as sales to new customers.
<PAGE> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
Net sales for the Company's other products and services for the three months
ended March 29, 1998 increased $32,876 (63%) to $84,955 from $52,079 for the
comparable period in 1997. This increase is primarily attributable to (i) an
expanding customer base from the continued industry-wide acceptance of its
service offerings, and (ii) the 1997 acquisitions of DSI, PCT and the IBM Austin
printed circuit board fabrication facility.
Excluding non-recurring charges, gross profit for the three months ended March
29, 1998 increased $7,262 to $33,442 from $26,180 for the comparable period in
1997. Excluding non-recurring charges, gross margin decreased to 14.2% for the
three months ended March 29, 1998 from 19.1% for the three months ended March
30, 1997. The gross margin decrease was primarily the result of (i) the increase
in the contract electronics manufacturing revenues which generate lower margins
than the Company's other products and service offerings, (ii) the incremental
production from the Multek Austin high volume printed circuit board fabrication
facility which carries lower gross margins than historical Multek quick-turn,
high margin business, (iii) inefficiencies and yield problems at Orbit,
associated with its 6-inch, 0.6 micron wafer fabrication process.
Selling, general and administrative (SG&A) expense increased $3,039 to $19,176
for the three months ended March 29, 1998 from $16,137 for the comparable period
in 1997. The percentage of SG&A expense to net sales decreased to 8.1% for the
three months ended March 29, 1998 from 11.8% for the three months ended March
30, 1997. The increase in absolute dollars was primarily attributable to (i) the
continued expansion of the Company's sales and marketing, finance, and other
general and administrative infrastructure necessary to support the Company's
growth, (ii) the addition of Multek's August 1997 acquisition of a high volume
printed circuit board fabrication facility in Austin, Texas, (iii) increased
SG&A expenses associated with the 72% increase in net sales in the three months
ended March 29, 1998 versus the comparable period in 1997. The percentage of
SG&A expense to net sales decreased during the three months ended March 29, 1998
versus March 30, 1997 due to the significant increase in revenues.
In March 1998, the Company recognized a non-recurring charge of $54 million,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor. The non-recurring charges consisted of
(i) $38,258 associated with the write-down of long-lived assets to fair value,
(ii) $7,900 associated with the impairment of sales contracts and accounts
receivable as well as estimated costs for sales returns and allowances,
primarily as a result of the fab changeover quality issues, and (iii) $7,842
primarily associated with excess inventory created by quality issues and the
downsizing of Orbit's operations.
Interest expense increased $3,019 to $4,719 for the three months ended March 29,
1998 from $1,700 for the comparable period in 1997. This increase is primarily
associated with the Company's issuance of $150,000 of 8.50% senior subordinated
notes in September 1997.
Amortization expense increased $321 to $1,121 for the three months ended March
29, 1998 from $800 for the comparable period in 1997. This increase is
attributable to the amortization of debt issue costs associated with the senior
subordinated notes issued in September 1997 and the amortization of the goodwill
associated with the DSI and PCT acquisitions.
Other income (net) increased $261 for the three months ended March 29, 1998 from
the comparable period of 1997, due primarily to increased net gains realized on
foreign currency transactions and sales of
<PAGE> 13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
property, plant and equipment in the three months ended March 29, 1998 as
compared with the three months ended March 30, 1997.
The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic income tax credits and lower effective income tax
rates on foreign earnings considered permanently invested abroad. The effective
tax rate for a particular year will vary depending on the mix of foreign and
domestic earnings, income tax credits and changes in previously established
valuation allowances for deferred tax assets based upon management's current
analysis of the realizability of these deferred tax assets. As foreign earnings
considered permanently invested abroad increase as a percentage of consolidated
earnings, the overall consolidated effective income tax rate will usually
decrease because the foreign earnings are generally taxed at a lower rate than
domestic earnings. The mix of foreign and domestic income from operations before
income taxes, the recognition of income tax loss and tax credit carryforwards
and management's current assessment of the required valuation allowance resulted
in an estimated effective income tax rate of 28% for the three months ended
March 29, 1998. The Company's effective income tax rate was 34% for the three
months ended March 30, 1997. This resulted from the mix of foreign and domestic
earnings, income tax credits, and changes in previously established valuation
allowances for deferred tax assets.
C. FOREIGN CURRENCY EXPOSURE
The Company conducts a significant amount of its business and has a number of
operating facilities in countries outside of the United States. As a result, the
Company may experience transaction and translation gains and losses because of
currency fluctuations. In order to minimize foreign exchange transaction risk,
the Company selectively hedges certain of its foreign exchange exposures through
forward exchange contracts, principally relating to nonfunctional currency
monetary assets and liabilities. To date, the Company's hedging activity has
been immaterial. The strategy of selective hedging can reduce the Company's
vulnerability to certain of its foreign currency exposures, and the Company
expects to continue this practice in the future. To date, the Company's hedging
activity has been immaterial, and there were no open foreign exchange contracts
as of March 29, 1998 or March 30, 1997.
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At March 29, 1998, the Company had working capital of $153,549 and a current
ratio of 2.1x compared to working capital of $160,618 and a current ratio of
2.2x at December 28, 1997. Cash and cash equivalents at March 29, 1998 were
$63,037, a decrease of $22,030 from $85,067 at December 28, 1997. This decrease
resulted from cash used by operating, financing and investing activities of
$585, $11,801 and $9,615, respectively.
The Company's net cash flows used by investing activities amounted to $11,801
and $14,162 for the three months ended March 29, 1998 and March 30, 1997,
respectively. Capital expenditures amounted to $15,153 and $14,293 for the three
months ended March 29, 1998 and March 30, 1997, respectively. This slight
increase is mainly attributable to the Company's continued investment in
state-of-the-art, high-technology equipment for its Multek and Dovatron
operating companies, which enables the Company to accept increasingly complex
and higher-volume orders. The Company received proceeds of $3,352 and $131 from
the sale of property, plant and equipment during the three months ended March
29, 1998 and
<PAGE> 14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS, CONTINUED
March 30, 1997, respectively, to allow for the potential replacement of older
property, plant and equipment with state-of-the-art, high-technology equipment.
The Company's net cash flows used by financing activities amounted to $9,615 and
$4,540 for the three months ended March 29, 1998 and March 30, 1997,
respectively. The Company repaid $3,279 and $4,805 in long-term financing
obligations in the three months ended March 29, 1998 and March 30, 1997,
respectively. The Company received $2,834 and $676 in proceeds from stock issued
under its stock plans in the three months ended March 29, 1998 and March 30,
1997, respectively.
The Company repurchased 435,000 shares of its common stock at a cost of $9,170.
The Company could repurchase an additional 372,500 shares of common stock in
future years as part of a one million share repurchase plan that began in
December 1997. Future common stock repurchases are subject to then existing
market and general economic conditions.
At March 29, 1998, the Company has an $80,000 senior secured revolving
line-of-credit which expires in June 2002. This credit facility requires
compliance with certain financial covenants and is secured by substantially all
of the Company's assets. There were no borrowings outstanding under the
line-of-credit, and the Company was in compliance with all financial covenants
as of March 29, 1998.
Management believes that cash generated from operations, existing cash reserves,
leasing capabilities, and the line-of-credit availability will be adequate to
fund the Company's current capital expenditure plan for fiscal 1998. The Company
intends to continue its acquisition strategy and it is possible that future
acquisitions may be significant. If available resources are not sufficient to
finance the Company's acquisitions, the Company would be required to seek
additional equity or debt financing.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing processes. The Company
believes that it is currently operating in compliance with applicable
regulations and does not believe that costs of compliance with these laws and
regulations will have a material effect upon its capital expenditures, results
from operations or competitive position.
The Company determines the amount of its accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
See Note 4 to the condensed consolidated financial statements for a description
of commitments, contingencies and environmental matters.
<PAGE> 15
ITEM 2. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1997, two related complaints, as amended, were filed in the District Court of
Boulder, Colorado and the U.S. District Court for the District of Colorado
against the Company and certain of its officers. The lawsuits purport to be
brought on behalf of a class of persons who purchased the Company's common stock
during the period from April 1, 1996, through September 8, 1996, and claim
violations of Colorado and federal laws based on allegedly false and misleading
statements made in connection with the offer, sale or purchase of the Company's
common stock at allegedly artificially inflated prices, including statements
made prior to the Company's acquisition of Orbit. The complaints seek
compensatory and other damages as well as equitable relief. The Company filed
motions to dismiss both amended complaints. The motion to dismiss the state
court complaint has been denied, and the Company has filed its answer denying
that it misled the securities market. The motion to dismiss the federal court
complaint is still pending. Both actions were brought by the same plaintiffs'
law firm as the Orbit action discussed below. The Company believes that the
claims asserted in both actions are without merit and intends to defend against
such claims vigorously. There has been no discovery from the Company in either
action and neither court has yet set a trial date.
A class action complaint (as amended in March 1996) for violations of federal
securities law was filed against Orbit and three of its officers in 1995 in the
U.S. District Court for the Northern District of California. The amended
complaint was dismissed on November 12, 1996, with leave to amend only as to
certain specified claims relating to the statements made by securities analysts.
In January 1997, a second amended complaint was filed. The second amended
complaint alleges that Orbit and three of its officers are responsible for
actions of securities analysts that allegedly misled the market for Orbit's then
existing public common stock. The second amended complaint seeks relief under
Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder. The second amended complaint seeks compensatory and other damages as
well as equitable relief. In September 1997, Orbit filed its answer to the
second amended complaint denying responsibility for the actions of securities
analysts and further denying that it misled the securities market.
A trial date has been set for January 1999.
In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business.
Although management is of the opinion that these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, the ultimate outcome of these matters cannot, at this
time, be predicted in light of the uncertainties inherent in litigation. See
Note 11 of the 1997 Consolidated Financial Statements included in Part II, Item
8 of the Company's Form 10-K Annual Report for the fiscal year ended December
28, 1997 for contingencies and environmental matters.
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting, which was held on May 5, 1998,
the Company's shareholders elected the following six persons as directors to
one-year terms: Ronald R. Budacz, Chairman and Chief Executive Officer, Carl R.
Vertuca, Jr., Executive Vice President, Robert L. Brueck, Constantine S.
Macricostas, Gerard T. Wrixon, Alexander W. Young. Not less than 22,373,207
shares were cast for each of the Directors.
The shareholders approved the proposal to amend the Restated Certificate of
Incorporation of the Company to increase the number of authorized shares of
common stock from 45,000,000 to 90,000,000 shares. Voting in favor were
22,174,105, opposed were 266,093, abstaining were 117,677, and broker non-votes
were zero.
The shareholders ratified the selection of Deloitte & Touche LLP as the
Company's independent auditors. Voting in favor were 22,279,530, opposed were
165,509, abstaining were 112,836, and broker non-votes were zero.
<PAGE> 17
ITEM 6(a). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amendment to the Restated Certificate of Incorporation.
10.1 Employment Agreement dated as of January 1, 1998 between The DII Group,
Inc. and Dermott O'Flanagan.
10.2 Employment Agreement dated as of January 1, 1998 between Nortavod
Corporation and Dermott O'Flanagan.
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- ----------------
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this report is
filed.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE DII GROUP, INC.
Date: May 12, 1998 By:/s/Carl R. Vertuca, Jr.
------------- -----------------------
Carl R. Vertuca, Jr.
Executive Vice President - Finance,
Administration and Corporate Development
Date: May 12, 1998 By:/s/Thomas J. Smach
------------- ------------------
Thomas J. Smach
Chief Financial Officer
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT LOCATION OF EXHIBIT IN
NUMBER DESCRIPTION SEQUENTIAL NUMBERING SYSTEM
- ------- ----------- ---------------------------
<S> <C> <C>
3.1 Amendment to the Restated Certificate of Incorporation.
10.1 Employment Agreement dated as of January 1, 1998 between The DII Group,
Inc. and Dermott O'Flanagan.
10.2 Employment Agreement dated as of January 1, 1998 between Nortavod
Corporation and Dermott O'Flanagan.
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
THE DII GROUP, INC.
The DII Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
FIRST: That the Board of Directors of the corporation, by the
unanimous written consent of its members, duly adopted resolutions setting
forth a proposed amendment of the Restated Certificate of Incorporation of said
corporation, declaring said amendment to be advisable and directing that said
amendment be considered at the next Annual Meeting of the stockholders of said
corporation. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Board of Directors of the
Corporation does hereby declare it advisable that the Restated
Certificate of Incorporation of the Corporation be amended to
increase the number of the Corporation's authorized shares to
95,000,000 shares comprised of 90,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock and that, in
order to effectuate said change, the lead-in sentence of
Article FOURTH of the Corporation's Restated Certificate of
Incorporation be amended to read as follows:
"FOURTH: The total number of shares of all
classes of stock which the Corporation is authorized to issue
is 95,000,000 shares, of which 90,000,000 shares, having a par
value of $.01 each, shall be Common Stock; and 5,000,000
shares shall be Preferred Stock, having a par value of $.01
each.";
<PAGE> 2
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the Annual Meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, The DII Group, Inc. has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by Ronald
R. Budacz, its Chairman of the Board and Chief Executive Officer, and attested
by Carl R. Vertuca, Jr., its Secretary, this 5th day of May, 1998.
By: /s/ Ronald R. Budacz
---------------------------------
Name: Ronald R. Budacz
Title: Chairman and Chief
Executive Officer
ATTEST:
By: /s/ Carl R. Vertuca, Jr.
----------------------------------------
Name: Carl R. Vertuca, Jr.
Title: Secretary
-2-
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
Agreement, made as of the 1st day of January 1998, by and
between The DII Group, Inc., a Delaware corporation (the "Company"), and
Dermott O'Flanagan ("Executive").
RECITALS
A. The Company desires to employ Executive as Senior Vice
President and President, DOVatron International, Inc.; and
B. Executive is willing to accept such employment on the terms
and conditions set forth in this Agreement.
THE PARTIES AGREE as follows:
1. Position and Term of Employment. Executive's
employment hereunder shall commence as of January 1, 1998 and shall end
December 31, 2000, unless terminated sooner pursuant to Section 6 of this
Agreement or extended by the mutual agreement of the parties. During the term
hereof, Executive shall be employed as Senior Vice President (and President,
DOVatron International, Inc.) of the Company and shall devote his full business
time, skill, attention and best efforts in carrying out his duties and
promoting the best interests of the Company. Executive shall also serve as a
director and/or officer of one or more of the Company's subsidiaries as may be
requested from time to time by the Board of Directors. Subject always to the
instructions and control of the Board of Directors of the Company, Executive
shall report to the Chief Executive Officer of the Company and shall be
responsible for the duties of the Senior Vice President and President, DOVatron
International, Inc.
<PAGE> 2
Executive's duties under this Agreement shall be limited to those duties
performed while present in the United States relating to the Company and the
Company's subsidiaries.
Executive shall not at any time while employed by the Company
or any of its affiliates or for a period of one (1) year following the later of
(i) termination of employment for any reason or (ii) the date on which the last
payment is required to be made under Section 2.1(a)(ii) hereof, without the
prior consent of the Board of Directors, knowingly acquire any financial
interests, directly or indirectly, in or perform any services for or on behalf
of any business, person or enterprise which undertakes any business in
competition with the business of the Company and its affiliates or sells to or
buys from or otherwise transacts business with the Company and its affiliates;
provided that Executive may acquire and own not more than five percent (5%) of
the outstanding capital stock of any public corporation or mutual fund.
Executive shall not at any time while employed by the Company or any of its
affiliates or for a period of two (2) years following termination of employment
for any reason, directly or indirectly, solicit for employment, employ or enter
into any business or contractual relationship with any employee of the Company
or any of its affiliates.
2.1 Base Salary. (a) (i) Executive shall be paid an
initial salary at the monthly rate of Twenty-Four Thousand Five Hundred
Eighty-Three and 33/100 Dollars ($24,583.33), which shall be paid in accordance
with the Company's normal payroll practice with respect to salaried employees,
subject to applicable payroll taxes and deductions (the "Base Salary").
Executive's Base Salary shall be subject to review and possible change in
accordance with the usual practices and policies of the Company. However,
Executive's base annual salary shall not be reduced unless such reduction is
part of a Company-wide reduction in pay scale and
-2-
<PAGE> 3
such reduction is proportionate to reductions imposed on the Company's and its
subsidiaries' employees; however, in no event may Executive's then current Base
Salary be reduced by more than 10%.
(ii) If for any reason other than Executive's voluntary resignation
or termination pursuant to Sections 6(a), (b) or (c) hereof, Executive does not
continue to be employed by the Company, Executive shall continue to receive an
amount equal to his then current Base Salary plus an annual performance bonus
equal to the highest annual bonus payment Executive has received in the
previous three years for the then remaining balance of the term of this
Agreement. In no event shall such payment be less than one year's base salary
plus such highest annual bonus. The foregoing amounts shall be paid to
Executive over the remaining term of this Agreement or one year (whichever is
applicable) in accordance with the Company's payroll and bonus payment
policies. Notwithstanding the foregoing, no payments under this subparagraph
(ii) shall be made if the Company makes all payments to Executive required to
be made under the Executive's Senior Executive Severance Agreement (the
"Severance Agreement") in the event of a Change in Control. For purposes of
this Agreement, a Change in Control shall be deemed to have taken place upon
the occurrence of any of the following events:
(A) any corporation, person, other entity or group (other
than the trustee of any qualified retirement plan maintained by the Company)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of securities representing
twenty percent (20%) or more of the combined voting power of the Company's then
outstanding securities; or
-3-
<PAGE> 4
(B) during any period of twenty-four consecutive months,
individuals who at the beginning of such consecutive twenty-four month period
constitute the Board of Directors cease for any reason (other than retirement
upon reaching normal retirement age, disability or death) to constitute at
least a majority thereof, unless the election or the nomination for election by
the Company's stockholders of each new director was approved by a vote of at
least two- thirds of the directors then still in office who were directors at
the beginning of such twenty-four month period; or
(C) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation, or the stockholders of the Company approve
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's assets; or
(D) there shall occur a transaction or series of
transactions which the Board of Directors shall determine to have the effect of
a Change in Control.
(b) If Executive resigns voluntarily or ceases to be employed by
the Company (or any affiliate) for any reason described in Section 6(a) or (c)
of this Agreement, all benefits
-4-
<PAGE> 5
described in Sections 2 and 3 hereof shall terminate (except to the extent
previously earned or vested).
(c) If Executive's employment shall have been terminated
pursuant to Section 6(b), the Company shall pay in equal monthly installments
for the then remaining balance of the term of this Agreement to Executive (or
his beneficiaries or personal representatives, as the case may be) disability
benefits at a rate per annum equal to one hundred percent (100%) of his then
current Base Salary, plus amounts equal to the highest annual bonus as provided
in clause (ii) of Section 2.1(a), less payments and benefits, if any, received
under any disability plan or insurance provided by the Company and less any
"sick leave" payments received from the Company for the applicable period.
2.2 Bonuses. Executive shall be eligible for an annual
performance bonus for calendar years beginning after December 31, 1997, in
accordance with the Company's Senior Executive Performance Bonus Plan. The
Company shall administer such bonus plan on a basis consistent with the past.
2.3 Expenses. During the term hereof, the Company shall
pay or reimburse Executive in accordance with the Company's normal practices
any travel, hotel and other expenses or disbursements reasonably incurred or
paid by Executive in connection with the services performed by Executive
hereunder, in each case upon presentation by Executive of itemized accounts of
such expenditures or such other supporting information as the Company may
require.
-5-
<PAGE> 6
3. Other Benefits. Executive shall be entitled to
receive the following benefits during the term of employment:
(a) participation in medical, dental, hospitalization,
disability and life insurance benefit plans made available by the Company to
its senior executives and Executive also shall be eligible to participate in
existing retirement or pension plans offered by the Company to its senior
executives, subject in each case to the terms and requirements of each such
plan or program;
(b) reimbursement for country club dues at one country
club;
(c) usage of a Company-furnished 1998 Audi A8 and
reimbursement for non-routine maintenance costs;
(d) due to the differences in education programs in the
United States as compared with Ireland, educational allowances of (i) $12,000
per school year commencing in September 1997 for one of Executive's children
for a period of five (5) years, and (ii) $12,000 per school year commencing
September 1998 for a second child for a period of three (3) years. In
addition, the Company shall make additional payments on an after-tax basis to
Executive equal to Executive's actual federal, state and local tax liability
resulting from such educational allowances. For purposes hereof, after-tax
basis shall mean with respect to any payment to be received or deemed to be
received by Executive, the amount of such payment (the "Base Payment")
supplemented by a further payment (the "Additional Payment") to Executive so
that the sum of the Base Payment plus the Additional Payment shall, after
deducting all taxes imposed on such Executive as a result of the receipt or
accrual of the Base Payment and such Additional Payment, be equal to the Base
Payment. In the event the Executive's employment is terminated pursuant to
Section 6(a) or (b), the Company shall continue to provide the benefits
-6-
<PAGE> 7
under this paragraph (d) for the balance of the term provided that the
Executive's children continue their education in the United States;
(e) the Company agrees to loan Executive the sum of
$550,000 to be applied towards the purchase of a residence. The term of such
loan shall be for a period ending December 31, 2000 subject to automatic
extension if the Company and the Executive extend this Employment Agreement (or
enter into a new Employment Agreement) in which event the term of the loan
shall be extended through the term of employment; provided that the loan shall
be accelerated in the event that (i) Executive resigns voluntarily or is
terminated pursuant to the provisions of Section 6(c) or (ii) Executive sells
the residence . The loan shall be interest-free, evidenced by a promissory
note and shall be secured by a second mortgage on the residence;
(f) payment of an annual financial and tax-planning
allowance in an amount up to 1% of base salary; and
(g) in the event that the Executive incurs liability as a
result of the vesting of performance shares in January 1996 and April 1997, the
Company shall make equitable provision in order to provide the Executive with
benefits on an equivalent basis as the Company's other senior executives, in
particular in the form of a loan to discharge the liability and provision for
the forgiveness of the indebtedness.
4. Confidential Information. Except as specifically
permitted by this Section 4, and except as required in the course of his
employment with the Company, while in the employ of the Company or thereafter,
Executive will not communicate or divulge to or use for the benefit of himself
or any other person, firm, association, or corporation without the prior
written consent of the Company, any Confidential Information (as defined
herein) owned, or
-7-
<PAGE> 8
used by the Company or any of its affiliates that may be communicated to,
acquired by or learned of by Executive in the course of, or as a result of,
Executive's employment with the Company or any of its affiliates. All
Confidential Information relating to the business of the Company or any of its
affiliates which Executive shall use or prepare or come into contact with shall
become and remain the sole property of the Company or its affiliates.
"Confidential Information" means information not generally
known about the Company and its affiliates, services and products, whether
written or not, including information relating to research, development,
purchasing, marketing plans, computer software or programs, any copyrightable
material, trade secrets and proprietary information, including, but not limited
to, customer lists.
Executive may disclose Confidential Information to the extent
it (i) becomes part of the public domain otherwise than as a result of
Executive's breach hereof or (ii) is required to be disclosed by law. If
Executive is required by applicable law or regulation or by legal process to
disclose any Confidential Information, Executive will provide the Company with
prompt notice thereof so as to enable the Company to seek an appropriate
protective order.
Upon request by the Company, Executive agrees to deliver to
the Company at the termination of Executive's employment, or at such other
times as the Company may request, all memoranda, notes, plans, records, reports
and other documents (and all copies thereof) containing Confidential
Information that Executive may then possess or have under his control.
5. Assignment of Patents and Copyrights. Executive
shall assign to the Company all inventions and improvements within the existing
or contemplated scope of the Company's business made by Executive while in the
Company's employ, together with any such
-8-
<PAGE> 9
patents or copyrights as may be obtained thereon, both domestic and foreign.
Upon request by the Company and at the Company's expense, Executive will at any
time during his employment with the Company and after termination regardless of
the reason therefor, execute all proper papers for use in applying for,
obtaining and maintaining such domestic and foreign patents and/or copyrights
as the Company may desire, and will execute and deliver all proper assignments
therefor.
6. Termination.
(a) This Agreement shall terminate upon
Executive's death.
(b) The Company may terminate Executive's
employment hereunder upon fifteen (15) days' written notice if in the opinion
of the Board of Directors, Executive's physical or mental disability has
continued or is expected to continue for one hundred and eighty (180)
consecutive days and as a result thereof, Executive will be unable to continue
the proper performance of his duties hereunder. For the purpose of determining
disability, Executive agrees to submit to such reasonable physical and mental
examinations, if any, as the Board of Directors may request and hereby
authorizes the examining person to disclose his findings to the Board of
Directors of the Company.
(c) The Company may terminate Executive's
employment hereunder "for cause" (as hereinafter defined). If Executive's
employment is terminated for cause, Executive's salary and all other rights not
then vested under this Agreement shall terminate upon written notice of
termination being given to Executive. As used herein, the term "for cause"
means the occurrence of any of the following:
(i) Executive having willfully and
continually failed to perform substantially his duties with
the Company (other than such failure
-9-
<PAGE> 10
resulting from incapacity due to physical or mental illness,
death or disability) after a written demand for substantial
performance has been delivered to the Executive by the Board
or the President of the Company which specifically identifies
the manner in which the Executive is not substantially
performing his duties; or (ii) Executive having willfully
engaged in conduct which is materially demonstrably injurious
to the Company. For purposes of this section, no act, or
failure to act, on the part of the Executive shall be
considered "willful" unless done, or omitted to be done, by
the Executive in bad faith and without reasonable belief that
such action or omission was in, or not opposed to, the best
interests of the Company. Any act or failure to act based
upon authority given pursuant to a resolution duly adopted by
the Board or based upon the advice of counsel to the Company
shall be conclusively presumed to be done or omitted to be
done by the Executive in good faith and in the best interests
of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for cause unless
and until there shall have been delivered to the Executive a
copy of a written resolution duly adopted by the affirmative
vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting called and held for that
purpose after reasonable notice to and opportunity for the
Executive and the executive's counsel to be heard by the
Board, finding that in the good faith opinion of the Board the
Executive was guilty of the conduct set forth above in (i) or
(ii) and specifying the particulars thereof in detail.
7. Additional Remedies. Executive recognizes that
irreparable injury will result to the Company and to its business and
properties in the event of any breach by Executive of the non-compete or
non-solicitation provisions of Section 1, the confidentiality provisions of
Section 4 or the assignment provisions of Section 5 and that Executive's
continued employment is predicated on the covenants made by him pursuant to
such Sections. In the event of any breach by Executive of his obligations
under said provisions, the Company shall be entitled, in addition to any other
remedies and damages available, to injunctive relief to restrain any such
breach by Executive or by any person or persons acting for or with Executive in
any capacity whatsoever and other equitable relief.
-10-
<PAGE> 11
8. Successors and Assigns. This Agreement is intended
to bind and inure to the benefit of and be enforceable by Executive and the
Company and their respective legal representatives, successors and assigns.
Neither this Agreement nor any of the duties or obligations hereunder shall be
assignable by Executive.
9. Governing Law; Jurisdiction. This Agreement shall be
interpreted and construed in accordance with the laws of the State of Colorado.
Each of the Company and Executive consents to the jurisdiction of any state or
federal court sitting in Colorado, in any action or proceeding arising out of
or relating to this Agreement.
10 Headings. The paragraph headings used in this
Agreement are for convenience of reference only and shall not constitute a part
of this Agreement for any purpose or in any way affect the interpretation of
this Agreement.
11. Severability. If any provision, paragraph or
subparagraph of this Agreement is adjudged by any court to be void or
unenforceable in whole or in part, this adjudication shall not affect the
validity of the remainder of this Agreement. In addition, to the extent
possible, a like valid term which meets the objective of the void or
unenforceable term shall be substituted for any such void or unenforceable
term.
12. Complete Agreement. This document embodies the
complete agreement and understanding among the parties, written or oral, which
may have related to the subject matter hereof in any way and shall not be
amended orally, but only by the mutual agreement of the parties hereto in
writing, specifically referencing this Agreement.
-11-
<PAGE> 12
13. Counterparts. This Agreement may be executed in
one or more separate counterparts, all of which taken together shall constitute
one and the same Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
THE DII GROUP, INC.
By: /s/ Ronald R. Budacz
---------------------------------------
Title: CHB/CEO
------------------------------------
/s/ Dermott O'Flanagan
------------------------------------------
DERMOTT O'FLANAGAN
-12-
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENT
Agreement, made as of the 1st day of January 1998, by and
between NortaVOD Corporation., a Delaware corporation (the "Company"), and
Dermott O'Flanagan ("Executive").
RECITALS
A. The Company desires to employ Executive as Senior Vice
President and Director of Overseas Operations; and
B. Executive is willing to accept such employment on the terms
and conditions set forth in this Agreement.
THE PARTIES AGREE as follows:
1. Position and Term of Employment. Executive's
employment hereunder shall commence as of January 1, 1998 and shall end
December 31, 2000, unless terminated sooner pursuant to Section 6 of this
Agreement or extended by the mutual agreement of the parties. During the term
hereof, Executive shall be employed as Senior Vice President and Director of
Overseas Operations of the Company and shall devote his full business time,
skill, attention and best efforts in carrying out his duties and promoting the
best interests of the Company. Executive shall also serve as a director and/or
officer of one or more of the Company's subsidiaries as may be requested from
time to time by the Board of Directors. Subject always to the instructions and
control of the Board of Directors of the Company, Executive shall report to the
Chief Executive Officer of the Company and shall be responsible for the duties
of the Senior Vice President and Director of Overseas Operations. Executive's
<PAGE> 2
duties under this Agreement shall be limited to those duties performed while
outside of the United States and shall be subject to the fulfillment by
Executive of his duties under his Employment Agreement with The DII Group, Inc.
("DII").
Executive shall not at any time while employed by the Company
or any of its affiliates or for a period of one (1) year following the later of
(i) termination of employment for any reason or (ii) the date on which the last
payment is required to be made under Section 2.1(a)(ii) hereof, without the
prior consent of the Board of Directors, knowingly acquire any financial
interests, directly or indirectly, in or perform any services for or on behalf
of any business, person or enterprise which undertakes any business in
competition with the business of the Company and its affiliates or sells to or
buys from or otherwise transacts business with the Company and its affiliates;
provided that Executive may acquire and own not more than five percent (5%) of
the outstanding capital stock of any public corporation or mutual fund.
Executive shall not at any time while employed by the Company or any of its
affiliates or for a period of two (2) years following termination of employment
for any reason, directly or indirectly, solicit for employment, employ or enter
into any business or contractual relationship with any employee of the Company
or any of its affiliates.
2.1 Base Salary. (a) (i) Initially, Executive shall
not be paid any base salary ("Base Salary") under this Agreement. Executive's
Base Salary shall be subject to review and possible change by the Board of
Directors of the Company.
(ii) If for any reason other than Executive's voluntary resignation
or termination pursuant to Sections 6(a), (b) or (c) hereof, Executive does not
continue to be employed by the Company, Executive shall continue to receive an
amount equal to his then current Base Salary under this Agreement plus an
annual performance bonus equal to the highest
-2-
<PAGE> 3
annual bonus payment Executive has received under this Agreement in the
previous three years for the then remaining balance of the term of this
Agreement. In no event shall such payment be less than one year's base salary
plus such highest annual bonus. The foregoing amounts shall be paid to
Executive over the remaining term of this Agreement or one year (whichever is
applicable) in accordance with the Company's payroll and bonus payment
policies. Notwithstanding the foregoing, no payments under this subparagraph
(ii) shall be made if the Company makes all payments to Executive required to
be made under the Executive's Senior Executive Severance Agreement (the
"Severance Agreement") in the event of a Change in Control. For purposes of
this Agreement, a Change in Control shall be deemed to have taken place upon
the occurrence of any of the following events:
(A) any corporation, person, other entity or
group (other than the trustee of any qualified retirement plan maintained by
DII) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of securities
representing twenty percent (20%) or more of the combined voting power of DII's
then outstanding securities; or
(B) during any period of twenty-four consecutive
months, individuals who at the beginning of such consecutive twenty-four month
period constitute the Board of Directors of DII cease for any reason (other
than retirement upon reaching normal retirement age, disability or death) to
constitute at least a majority thereof, unless the election or the nomination
for election by DII's stockholders of each new director was approved by a vote
of at least two-thirds of the directors then still in office who were directors
at the beginning of such twenty-four month period; or
-3-
<PAGE> 4
(C) the stockholders of DII approve a merger or
consolidation of DII with any other corporation, other than a merger or
consolidation which would result in the voting securities of DII outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the combined voting power of the voting securities of
DII or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of DII approve a plan of complete
liquidation of DII or an agreement for the sale or disposition by DII of all or
substantially all of DII's assets; or
(D) there shall occur a transaction or series of
transactions which the Board of Directors shall determine to have the effect of
a Change in Control.
(b) If Executive resigns voluntarily or ceases to be
employed by the Company (or any affiliate) for any reason described in Section
6(a) or (c) of this Agreement, all benefits described in Sections 2 and 3
hereof shall terminate (except to the extent previously earned or vested).
(c) If Executive's employment shall have been terminated
pursuant to Section 6(b), the Company shall pay in equal monthly installments
for the then remaining balance of the term of this Agreement to Executive (or
his beneficiaries or personal representatives, as the case may be) disability
benefits at a rate per annum equal to one hundred percent (100%) of his then
current Base Salary under this Agreement, plus amounts equal to the highest
annual bonus as provided in clause (ii) of Section 2.1(a), less payments and
benefits, if any, received under any disability plan or insurance provided by
the Company and less any "sick leave" payments received from the Company for
the applicable period.
-4-
<PAGE> 5
2.2 Bonuses. Executive shall be eligible for an annual
performance bonus for calendar years beginning after December 31, 1997, in the
discretion of the Company's Board of Directors
2.3 Expenses. During the term hereof, the Company shall
pay or reimburse Executive in accordance with the Company's normal practices
any travel, hotel and other expenses or disbursements reasonably incurred or
paid by Executive in connection with the services performed by Executive
hereunder, in each case upon presentation by Executive of itemized accounts of
such expenditures or such other supporting information as the Company may
require.
3.1 Stock Options; Performance Shares. Executive shall
be eligible for grants of stock options and performance share awards under
DII's 1994 Stock Incentive Plan (the "Plan"), as may hereafter be determined by
the Compensation Committee of the Board of Directors of DII under the Plan.
Stock options and performance share awards under this Section 3.1 shall be
deemed to be granted exclusively for Executive's services under this Agreement.
3.2 Effect of Termination of Employment; Change in
Control. (a) Notwithstanding the provisions of Executive's options, if
Executive shall resign voluntarily or cease to be employed by the Company (or
an affiliate) other than as a result of death or disability, Executive shall be
entitled to exercise such options to the extent such options could otherwise
have been exercised immediately prior to the time of termination at any time up
to and including 90 days after the date of termination, but not beyond the
expiration date of an option. This provision is not intended to limit any
other rights that Executive may have with respect to the vesting or exercise of
options.
-5-
<PAGE> 6
(b) If Executive shall die or become disabled, all
options and performance shares which have not vested will accelerate and vest
immediately, and, in the event of Executive's death, all option rights will
transfer to Executive's representative. All then unexercised options will be
cancelled one year after Executive dies or becomes disabled.
(c) If there is a Change in Control, all options and
performance shares which have not vested will accelerate and vest immediately.
4. Confidential Information. Except as specifically
permitted by this Section 4, and except as required in the course of his
employment with the Company, while in the employ of the Company or thereafter,
Executive will not communicate or divulge to or use for the benefit of himself
or any other person, firm, association, or corporation without the prior
written consent of the Company, any Confidential Information (as defined
herein) owned, or used by the Company or any of its affiliates that may be
communicated to, acquired by or learned of by Executive in the course of, or as
a result of, Executive's employment with the Company or any of its affiliates.
All Confidential Information relating to the business of the Company or any of
its affiliates which Executive shall use or prepare or come into contact with
shall become and remain the sole property of the Company or its affiliates.
"Confidential Information" means information not generally
known about the Company and its affiliates, services and products, whether
written or not, including information relating to research, development,
purchasing, marketing plans, computer software or programs, any copyrightable
material, trade secrets and proprietary information, including, but not limited
to, customer lists.
Executive may disclose Confidential Information to the extent
it (i) becomes part of the public domain otherwise than as a result of
Executive's breach hereof or (ii) is required to
-6-
<PAGE> 7
be disclosed by law. If Executive is required by applicable law or regulation
or by legal process to disclose any Confidential Information, Executive will
provide the Company with prompt notice thereof so as to enable the Company to
seek an appropriate protective order.
Upon request by the Company, Executive agrees to deliver to
the Company at the termination of Executive's employment, or at such other
times as the Company may request, all memoranda, notes, plans, records, reports
and other documents (and all copies thereof) containing Confidential
Information that Executive may then possess or have under his control.
5. Assignment of Patents and Copyrights. Executive
shall assign to the Company all inventions and improvements within the existing
or contemplated scope of the Company's business made by Executive while in the
Company's employ, together with any such patents or copyrights as may be
obtained thereon, both domestic and foreign. Upon request by the Company and
at the Company's expense, Executive will at any time during his employment with
the Company and after termination regardless of the reason therefor, execute
all proper papers for use in applying for, obtaining and maintaining such
domestic and foreign patents and/or copyrights as the Company may desire, and
will execute and deliver all proper assignments therefor.
6. Termination.
(a) Subject to the provisions of Section 8, this
Agreement shall terminate upon Executive's death.
(b) The Company may terminate Executive's employment
hereunder upon fifteen (15) days' written notice if in the opinion of the Board
of Directors, Executive's physical or mental disability has continued or is
expected to continue for one hundred and eighty (180) consecutive days and as a
result thereof, Executive will be unable to continue the proper
-7-
<PAGE> 8
performance of his duties hereunder. For the purpose of determining
disability, Executive agrees to submit to such reasonable physical and mental
examinations, if any, as the Board of Directors may request and hereby
authorizes the examining person to disclose his findings to the Board of
Directors of the Company.
(c) The Company may terminate Executive's employment
hereunder "for cause" (as hereinafter defined). If Executive's employment is
terminated for cause, Executive's salary and all other rights not then vested
under this Agreement shall terminate upon written notice of termination being
given to Executive, subject to the provisions of Section 8. As used herein,
the term "for cause" means the occurrence of any of the following:
(i) Executive having willfully and
continually failed to perform substantially his duties with
the Company (other than such failure resulting from incapacity
due to physical or mental illness, death or disability) after
a written demand for substantial performance has been
delivered to the Executive by the Board or the President of
the Company which specifically identifies the manner in which
the Executive is not substantially performing his duties; or
(ii) Executive having willfully engaged in conduct which is
materially demonstrably injurious to the Company. For
purposes of this section, no act, or failure to act, on the
part of the Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive in bad faith and
without reasonable belief that such action or omission was in,
or not opposed to, the best interests of the Company. Any act
or failure to act based upon authority given pursuant to a
resolution duly adopted by the Board or based upon the advice
of counsel to the Company shall be conclusively presumed to be
done or omitted to be done by the Executive in good faith and
in the best interests of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been
terminated for cause unless and until there shall have been
delivered to the Executive a copy of a written resolution duly
adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at
a meeting called and held for that purpose after reasonable
notice to and opportunity for the Executive and the
executive's counsel to be heard by the Board, finding that in
the good faith opinion of the Board the Executive was guilty
of the conduct set forth above in (i) or (ii) and specifying
the particulars thereof in detail.
-8-
<PAGE> 9
7. Additional Remedies. Executive recognizes that
irreparable injury will result to the Company and to its business and
properties in the event of any breach by Executive of the non-compete or
non-solicitation provisions of Section 1, the confidentiality provisions of
Section 4 or the assignment provisions of Section 5 and that Executive's
continued employment is predicated on the covenants made by him pursuant to
such Sections. In the event of any breach by Executive of his obligations
under said provisions, the Company shall be entitled, in addition to any other
remedies and damages available, to injunctive relief to restrain any such
breach by Executive or by any person or persons acting for or with Executive in
any capacity whatsoever and other equitable relief.
8. Deferred Compensation Account; Contributions to
Trust. All compensation earned under this Agreement (other than stock option
grants) shall be deferred in accordance with the provisions of this Section 8.
(a) The Company shall credit to a book reserve (the "Deferred
Compensation Account") established for this purpose an amount equal to all
compensation earned under this Agreement (other than stock option grants). Any
amounts represented by credits made to the Deferred Compensation Account in
accordance with the preceding sentence shall be contributed by the Company to
the trust (the "Trust") established under the Trust Agreement annexed as
Exhibit A hereto. In the case of Performance Shares, the amount of the
deferred Performance Shares shall be credited to the Deferred Compensation
Account upon vesting in the form of Stock Units. A corresponding number of
shares of Common Stock shall be transferred by the Company to the Trust, to be
held in accordance with the provisions of the Trust Agreement.
(b) The Deferred Compensation Account shall be credited with
all amounts of cash compensation that are deferred pursuant to this Agreement,
and shall be debited or credited
-9-
<PAGE> 10
with amounts representing all losses or earnings debited or credited to an
account established in respect of the Executive under the Trust. The Deferred
Compensation Account also shall be charged from time to time with all amounts
that are distributed to the Executive.
(c) With respect to Stock Units, in the event DII declares
and pays a dividend, the Deferred Compensation Account shall be credited with
an amount equal to the amount of the dividend paid on the number of shares of
Common Stock equal to the number of Stock Units in the Deferred Compensation
Account. In the event of any stock dividend, stock split, combination or
exchange of shares of Common Stock, recapitalization or other change in the
capital structure of DII, corporate separation or division (including, but not
limited to, split-up, spin-off or distribution to DII shareholders other than a
normal cash dividend), sale by DII of all or a substantial portion of its
assets, rights offering, merger, consolidation, reorganization or partial or
complete liquidation, or any other corporate transaction or event having an
effect similar to any of the foregoing, the number of Stock Units in the
Deferred Compensation Account shall be appropriately adjusted in an equitable
manner or there shall be made such other equitable adjustments to the Deferred
Compensation Account.
(d) Amounts contributed to the Trust and credited to the
Executive's account thereunder shall be invested and reinvested, at the
direction of the Executive, in accordance with the provisions of the Trust
Agreement. The assets of the Trust shall be considered part of the general
assets of the Company subject to the claims of its general creditors.
(e) The Executive agrees on behalf of himself and his
designated beneficiary to assume all risk in connection with any debits or
credits made to his account under the Trust by reason of losses or earnings on
investments made in accordance with the provisions of the Trust Agreement.
-10-
<PAGE> 11
(f) If the Executive experiences an Unforeseeable Financial
Emergency, the Executive may, with the approval of the Company, receive a
partial or full distribution of his Deferred Compensation Account. The
distribution shall not exceed the amount reasonably needed to satisfy the
Unforeseeable Financial Emergency.
(g) The Executive may at any time elect to withdraw all of
the balance then credited to his Deferred Compensation Account, less a ten (10)
percent withdrawal penalty. Thereafter, the provisions of this Section 8 shall
no longer continue in effect.
(h) Upon the earlier of (i) a period of 30 days shall have
elapsed after the Executive ceases to be a resident of the United States, and
(ii) the earliest date reasonably practicable following the Executive's
Termination of Employment, the Company shall pay (or cause to be paid from the
Trust) to the Executive or to the Executive's beneficiary or estate (in the
event of his death) a lump sum amount equal to his Deferred Compensation
Account. All payments shall be made in cash, except that distributions
representing Stock Units shall be made in shares of Common Stock.
(i) The beneficiary referred to in paragraph (h) above may be
designated or changed by the Executive on a form provided by the Company and
delivered to the Company before his death. If no such beneficiary shall have
been designated, or if no designated beneficiary shall survive the Executive,
the lump sum payment payable under paragraph (h) above shall be payable to the
Executive's surviving spouse or, if none, his estate.
(j) For purposes of this Agreement:
"Change in Control" shall mean a change in control of the Company,
which shall be deemed to have occurred if the conditions set forth in any one
of the following four paragraphs shall have been satisfied:
-11-
<PAGE> 12
(i) any corporation, person, other entity or group (other
than the trustee of any qualified retirement plan maintained by DII)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of
securities representing twenty percent (20%) or more of the combined
voting power of DII's then outstanding securities; or
(ii) during any period of twenty-four consecutive months,
individuals who at the beginning of such consecutive twenty-four month
period constitute the Board of Directors of DII cease for any reason
(other than retirement upon reaching normal retirement age, disability
or death) to constitute at least a majority thereof, unless the
election or the nomination for election by the Company's shareholders
of each new director was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning
of such twenty-four month period;
(iii) the shareholders of DII approve a merger or
consolidation of DII with any other corporation, other than a merger
or consolidation which would result in the voting securities of DII
outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity) at least 80% of the combined voting power of
the voting securities of DII or such surviving entity outstanding
immediately after such merger or consolidation, or the shareholders of
DII approve a plan or complete liquidation of DII or an agreement for
the sale or disposition by DII of all or substantially all DII's
assets;
-12-
<PAGE> 13
(iv) there shall occur a transaction or series of
transactions which the Board of Directors of DII shall determine to
have the effect of a Change in Control.
"Common Stock" shall mean the Common Stock, par value $0.01 of
DII, or any security of DII issued in substitution, exchange or in lieu
thereof.
"Performance Shares" shall mean performance shares awarded
under DII's 1994 Stock Incentive Plan and under any successor plan of DII which
permits the awardee to elect to defer the Performance Shares.
"Stock Units" shall mean bookkeeping units in the Deferred
Compensation Account, each of which represents a share of Common Stock.
"Termination of Employment" shall mean the Executive's
cessation of employment or service with the Company or any affiliate
voluntarily or involuntarily, for any reason.
"Unforeseeable Financial Emergency" shall mean an
unanticipated emergency that is caused by an event beyond the control of the
Executive that would result in severe financial hardship to the Executive
resulting from (i) a sudden and unexpected illness or accident of the Executive
or a dependent of the Executive, (ii) a loss of the Executive's property due to
casualty, or (iii) other such extraordinary and unforeseeable circumstances,
all as determined in the sole discretion of the Company.
(k) It is the intention of the parties hereto that the
arrangement described in this Agreement be unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended. Nothing in this Agreement or the Trust Agreement and no action taken
pursuant to the provisions of this Agreement or the Trust Agreement shall
-13-
<PAGE> 14
create or be construed to create a fiduciary relationship between the Company
and the Executive, his designated beneficiary or any other person. Any funds
that may be invested under the provisions of the Trust Agreement shall continue
for all purposes to be a part of the general funds of the Company and no person
other than the Company shall by virtue of the provisions of this Agreement have
any interest in such funds. To the extent that any person acquires a right to
receive payments from the Company under this Agreement, such right shall be no
greater than the right of any unsecured general creditor of the Company. This
Agreement constitutes a mere promise by the Company to make a benefit payment
in the future.
(l) The Company or the trustee of the Trust shall withhold
from benefits distributed under this Agreement all income, employment and other
taxes required to be withheld by applicable law.
(m) After a Change in Control, if any person or entity has
failed to comply (or is threatening not to comply) with any of its obligations
under this Agreement or the Trust, or takes or threatens to take any action to
deny, diminish or to recover from the Executive the benefits intended to be
provided hereunder, the Company shall reimburse the Executive for reasonable
attorneys' fees and related costs incurred in the successful pursuance or
defense of the Executive's rights. If the Executive does not prevail,
attorneys' fees shall also be payable under the preceding sentence to the
extent the Executive had reasonable justification for retaining counsel, but
only to the extent that the scope of such representation was reasonable.
(n) No benefit under this Agreement shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, and any attempt to do so shall be void. No benefit
under this Agreement shall in any manner be liable for
-14-
<PAGE> 15
or subject to the debts, contracts, liabilities, engagements or torts of the
person entitled to any such benefit, except as specifically provided in this
Agreement.
9. Successors and Assigns. This Agreement is intended
to bind and inure to the benefit of and be enforceable by Executive and the
Company and their respective legal representatives, successors and assigns.
Neither this Agreement nor any of the duties or obligations hereunder shall be
assignable by Executive.
10. Governing Law; Jurisdiction. This Agreement shall be
interpreted and construed in accordance with the laws of the State of Colorado.
Each of the Company and Executive consents to the jurisdiction of any state or
federal court sitting in Colorado, in any action or proceeding arising out of
or relating to this Agreement.
11. Headings. The paragraph headings used in this
Agreement are for convenience of reference only and shall not constitute a part
of this Agreement for any purpose or in any way affect the interpretation of
this Agreement.
12. Severability. If any provision, paragraph or
subparagraph of this Agreement is adjudged by any court to be void or
unenforceable in whole or in part, this adjudication shall not affect the
validity of the remainder of this Agreement. In addition, to the extent
possible, a like valid term which meets the objective of the void or
unenforceable term shall be substituted for any such void or unenforceable
term.
13. Complete Agreement. This document embodies the
complete agreement and understanding among the parties, written or oral, which
may have related to the subject matter hereof in any way and shall not be
amended orally, but only by the mutual agreement of the parties hereto in
writing, specifically referencing this Agreement.
-15-
<PAGE> 16
14. Counterparts. This Agreement may be executed in
one or more separate counterparts, all of which taken together shall constitute
one and the same Agreement.
15. Miscellaneous. Executive acknowledges that the
Company is not responsible for the tax attributes of Executive's compensation
under this Agreement. Executive shall be solely responsible for Executive's
income tax liability and any other tax liability, and the Company expressly
disavows any responsibility or warranty in connection therewith.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
NORTAVOD CORPORATION
By: /s/ Ronald R. Budacz
-----------------------------------------
Title: CHB/CEO
--------------------------------------
/s/ Dermott O'Flanagan
--------------------------------------------
DERMOTT O'FLANAGAN
-16-
<PAGE> 1
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
The DII Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
DII Group, Inc. and subsidiaries (the "Company") as of March 29, 1998, and the
related condensed consolidated statements of operations and cash flows for the
thirteen weeks ended March 29, 1998 and March 30, 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The DII Group, Inc. and
subsidiaries as of December 28, 1997, and the related consolidated statements
of income, stockholders' equity, and cash flows for the 52 weeks then ended
(not presented herein); and in our report dated January 22, 1998, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 28, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
May 6, 1998
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</TABLE>
